Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Is an employer reimbursement for tax-advisory-services expenses incurred due to employer payroll errors included in the employee's income?
Reasons: See response
April 28, 2017
XXXXXXXXXX Income Tax Rulings Directorate
SUBJECT: Phoenix: Reimbursements for tax advisory services
We are writing in response to your email dated April 24, 2017, concerning the taxation of reimbursements made to employees for expenses incurred because of the employer’s payroll error or errors. More specifically, you asked whether a reimbursement by the employer for the cost of tax advisory services incurred as result of Phoenix pay system errors will be required to be included in the employee’s income.
It is our understanding that an employee who was affected by Phoenix pay system errors may be eligible for reimbursement for 2016 and/or 2017 tax advisory services if:
- the employee was overpaid and/or underpaid in the 2016 and/or 2017 tax year; or
- the employee’s 2016 tax slips were incorrect on, or after, February 28, 2017; or
- the employee’s 2017 tax slips were incorrect on, or after, February 28, 2018.
We also understand that tax advisory services will be provided by an accountant or qualified tax professional and include:
- tax advice to help the employee understand the impact of Phoenix pay system errors (e.g., overpayment and/or underpayments) on their 2016 or 2017 income taxes;
- preparation of an employee’s 2016 or 2017 income tax return in cases where their income tax situation has been affected by Phoenix pay system errors; and
- reconciliation of income reported on an employee’s 2016 or 2017 tax slip against income actually received by the employee.
You have also indicated that receipts must be provided and that no amount will be reimbursed for the cost of tax software or costs incurred for tax advisory services not related to Phoenix pay system errors, such as for small business or investment activities.
Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment, explains the federal income tax treatment of benefits and allowances received from employment. As noted in paragraph 2.9 of this folio:
2.9 Generally, “the value of board, lodging, and other benefits of any kind whatever received or enjoyed … in respect of, in the course of, or by virtue of an office or employment” is included in an employee’s income under paragraph 6(1)(a).
Paragraphs 2.14 and 2.15 of the folio further discuss when a benefit may or may not be included in an employee’s income:
2.14 In Lowe v The Queen, 96 DTC 6226, the Federal Court of Appeal confirmed that generally, the value of a benefit will be included in an employee’s income under paragraph 6(1)(a) where the employee or an individual not dealing at arm’s length with the employee:
- receives an economic advantage measurable in monetary terms; and
- is the primary beneficiary of the benefit.
2.15 An employee or an individual not dealing at arm’s length with an employee, generally receives an economic advantage when an employer pays or provides a reimbursement for their personal or living expenses. An employee also receives an economic advantage when an employer pays for or reimburses the cost of an employee-owned asset, even if that asset is used for employment purposes. There is generally no economic advantage if the employee is simply restored to a previous economic position…
Generally, compensation paid to an employee by their employer for financial loss incurred due directly to the employer’s error is not included in income since the employee is being restored to a previous economic position. Therefore, reasonable employer reimbursements for the cost of tax advisory services incurred as a direct result of Phoenix pay system errors will not be included in the employee’s income and will not have to be reported on the employee’s T4.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure.
We trust these comments will be of assistance to you.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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